SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

For the Quarter ended November.3O, 1987

E-II HOLDINGS INC.(Exact name of regishant as specified in its charter)

1-9551 Delaware 36-3511556(Commission Ftle No.) (State or other jurisdiction of (I.R.S. Employer

incorporation or organization) Identiffcation Number)

Two North LaSalle St.Chicago, Illinois

(Address of principal executive offices)

fifi2(Zip Code)

Registrants' telephone number, including area code: (312) 558-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13

or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period

that tle registrants were required to file such reports) and (2) has been subject to such filing requirementsfor the past 90 days. Yes y' . No _.

As of January 11, 1988, 6118461377 shares of E-II Holdings Inc. common stock were outstanding.

PART I. FINANCIAL INFORMATION

E.II HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEET

Cn millions)

November30, February28,1987 1987

G;d;ffi N"t.r,ASSETS

Current assets:

Cash .

Short-term investments, less valuation allowance of $147.5 and nil,respectively

Receivables, less allowance for doubtful accounts of $9.8 and $8.8, respectively . .

InventoriesOther current assets.

Total current assets

Property, plant and equipment, net of accumulated depreciation of $69.4 and$35.1, respectively . . .

Intangible assets, principally goodwill and unallocated purchase cost, respec-tively .

Other noncurrent assets.

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:Short-term debt ..Accounts payable and accrued expenses

Current maturities of long-term debt . .

Total current liabilitiesLong-term debt .

BCI NotesOther noncurrent liabilities. . . .Contingent liabilitiesStockholders' equity:

Preferred stock .

Common stock .

Capital surplusAccumulated deficit.BII Group equity

Total stockholders' equity

$ 13.1

831.6272.1238.3

31.0

1,386.1

319.4

507.981.1

$ 37.6290.6

3.3

7.4

7.5234.7212.1

30.0

491.7

304.3

509.05t.2

$2,294.5 $1,356.2

$ 40.3173.6

3.7

331.51,537.6

30.4

-.6556.7

(162.3)

217.639.6

800.029.1

269.9

395.0 269.9

$2,294.5 $1,356.2

See Notes to Condensed Consolidated Financial Statements.

E.II HOLDINGS INC.

CONDENSED CONSOLIDATED INCOME STATEMENT (Note 2)

(Unaudited)(In millions, except per share data)

Net sales

Cost of sales

Grossearnings...Selling and administrative expenses

Amortization of intangible assets

Operating earningsInterest expenseBCI interest allocationInvestment losses, net . .

Miscellaneous income (expense), net . . .

Earnings (loss) before income taxes and extraordinary item , . . . .

Income tax expense

Earnings (loss) before extraordinary itemExtraordinary item

Periods ended November 30,

Quarter Nine Months

1987 1986

$ 463.9 $415.1 $1,223.9 $1,096.5293.5 264.9 786.4 712.3

170.4 ts0.2115.4 101.43.3 3.4

437.5 384.2330.8 288.1

9.9 8.5

(t26.r)

___19(rzs.7)

6.2

(13Le)

2t.612,8

8.8

51.7 45.4(50.e) (1.6)

(22.s)

96.8 87.6(8s.s) (4.6)(30.5) (s6.3)

(l 13.7).1 2.1

(132.8) 28.8tt.z t7.4

(144.0)

Q6.0)

,:-

.3

Net earnings (loss) . $(131.9) $ 8.8 $ (170.0) $ 11.4

Weighted-average common shares outstandingCommon share equivalents . .

Earnings (loss) per share:Before extraordinary item

Net earnings (loss) .

a* a* t* a*4.3

61.8

!9,19!e!)

66.1 61.8 66.1

$ .13 $(2.33) $ .17:: :$ .13 $(2.75) $ .17: : :

See Notes to Condensed Consolidated Financial Statements.

E.II HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION (Note 2)

(Unaudited)(In millions)

Cash provided (used) by operations:Earnings (oss) before extraordinary itemItems not involving cash:

Depreciation and amortization . . .

Deferred taxes and other items, net . . .

Changes in working capital, excluding cash, short-term investmentsand current debt ..Cash provided (used) by operations before extraordinary item . . .

Net cash used by extraordinary item . .

Cash provided (useQ by operations .. ...Cash used by investment activities:

Net expenditures for property, plant and equipmentOther items, net . . .

Cash used by investment activities

Cash provided (used) by financing activities:

Periods ended November 30,

Nine Montls

$ (131.e) $ 8.8 $ (144.0) $ 11.4

(36.2)

r15i?,

i'_(119

3.3

12.41.5

36.9 32.5

3.4

52.3 (24.3')

(sr.4) te.6

(154.2) 3.3 (51.4) 1e.6

(27.7) (7.7)(.5) __gg

(28.2') (16.2)

(46.6)(8.2)

(54.8)

(26.6)

_c?Q(38.e)

Change in debt, excluding Offerings .9

Proceeds from Otrerings. . . .

Transactions with BCI:Repayment of BCI Notes.BCI interest allocationAdministrative cost allocationIncome tax allocationNet cash transferred

Other items, net . . .

Cash provided (used) by financing activities

Increase (decrease) in cash and short-term investments . . . .

Cash and short-term investments at beginning of period

Cash and short-term investments at end of period

- i.t5.0

10.5(4r.6)

(2.1) t2.t

(5.1) 6.e1,739.8

(800.0)30.5 56.36.7 15.0

.2 tt.2(54.0) (86.6)17.9 19.7

6.6

(r.2) 15.1

(183.6) 2.21,028.3 9.9

q_!f{ q_P.1

22,5

829.814.9

q_!44{ $ 12.1

3.28.9

See Notes to Condensed Consolidated Financial Statements.

E.II HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Background

Distibution:

E-II Holdings Inc. ("8-II") is a holding company formed on May 4, lg87 by Beatrice Company,formerly BCI Holdings Corporation ("BCI"). On July 2,1987 BCI distributed its ownership in E-II to itsstockholders and warrant holders (the "Distribution"). Concurrent with the Distribution BCI transferred 15

operating companies, comprising substantially all of its nonfood and food specialty businesses, to E-II inexchange for 41.1 million E-II common shares all of which were distributed in the Distribution. In addition,options to acquire 5.3 million E-II common shares were issued to BCI option holders in accordance with theanti-dilution provisions of their option agreements.

Intercompany indebtedness, aggregating $800 million and evidencedby ll.25Vo senior promissory notes(the "BCI Notes"), remained payable to BCI after the Distribution. All other intercompany amounts existingbetween the operating units and BCI on the Distribution date were capitalized or contributed to E-II.

As further described in Note 5, on July 9, 1987, E-II received net cash proceeds of approximately $1.7billion from the issuance of common equity and debt securities (the "Oferings").

BCI Acquisition:

The operating companies transferred to E-II (the "E-II Group") were acquired by BCI in April 1986(the "BCI Acquisition") when it acquired Beatrice Companies, Inc. ("Beatrice"). The net assets of the BIIGroup included an assignment of BCI's purchase price amounting to approximately $ 1. I billion consisting of$800 million of intercompany indebtedness and $268 million of equity. This assignment was determined based

upon the ratio of the aggregate fair market value of the E-II Group to the aggregate fair market value ofBeatrice as determined by an independent investment banking firm as of the BCI Acquisition date, after grving

effect to the Beatrice businesses sold or under contract for sale as of May 1987. The assigned purchase pricewas preliminarily allocated to the net asset components of the E-II Group during fiscal 1987 and finalized infiscal 1988. The final allocation increased intangible assets by $7.2 million due primarily to a decrease in thevaluation of property, plant and equipment as compared to the preliminary valuation, based upon final asset

appraisal reports. The final allocation is summarized, in millions, as follows.

E-II Group equity . $ 267.5

Indebtedness to BCI 800.0

Purchasepriceassigned..... 9I9qINet book value of the E-II Group prior to the BCI Acquisition $ 505.2

Fair market value adjustments:Intangible assets . 484.7

Property, plant and equipment 51.3

Deferred financing costs . 26.0

Other, net . .. .3

Excess ofpurchase price over net book value 562.3

Fair market value of net assets acquired 11,06?5

The deferred financing costs were associated with intercompany indebtedness resulting from the BCIAcquisition. The repayment of the BCI Notes resulted in a noncash extraordinary charge to earnings of $26million ($.42 per share) for these previously deferred financing costs.

E.II HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Pro Forma Data:Had the transactions described above occurred at the beginning of the periods presented, unaudited pro

forma results of operations would have been as follows (in millions, except per share data):Periods ended November 30,

Quarter Nine Months

1987 1986 t98,

Net sales

Operating earningsInterest expenseOther,net...Loss before income taxes .

Income tax expense

Loss before extraordinary item

Weighted-average common shares outstanding

Loss per share before extraordinary item. .

u632 $111,_l

$ 51.7 $ 45.6(so.e) (50.1)

(r26.s) __G1)(125.7) (5.6)

6.2 6.0

gliu) $(uo___q! *_q{$ (2.13) $_Gg

$1,2232$ 96.8

(153.4)(115.4)(172.o)

tL.2$ (183.2)

$1,096.5

$ 85.9(150.3)

(2.r)(66.s)

9.5

$ (76.0)

6r.8 61.8::$ (2.e6) $ (1.23)

Pro forma adjustments provide additional interest expense reflecting the issuance of $1.5 billion in debtsecurities; eliminate interest expense reflecting the repayment of the BCI Notes; and provide incrementalamortization and depreciation expense caused by the allocation of the assigned purchase price resulting fromthe BCI Acquisition. Pro forma results do not assume any additional investment income on excess cashbalances and do not purport to be indicative of the results that would have been obtained had thesetransactions actually occurred at the beginning of the periods presented. The pro forma data presented arenot a projection of future results. Pro forma weighted-average shares outstanding and per share data assumethe shares issued in the Distribution and the Offerings (Note 5) were outstanding throughout the periodspresented.

2. Basis of PresentationIn periods prior to the Distribution, the E-II Group was comprised of both subsidiaries and divisions of

BCI or its predecessor (both of which are referred to as the "Parent"). The financial staternents for suchperiods combine the accounts of the E-II Group. The E-II Group equity account represents the Parent'sinvestment in the operating units, net of any intercompany accounts exclusive of the BCI Notes.

Weighted-average shares outstanding and per share data for periods prior to the Distribution assumethe shares issued in the Distribution (Note 1) and the Offerings (Note 5) were outstanding throughout suchperiods.

Included in the periods prior to the Distribution are allocations of Parent expenses which are intendedto reflect the costs which would have been incurred had the E-II Group been operated on a stand-alone basis.

Administrative costs, aggregating $20 million on an annual basis, were allocated based upon a studyconducted by BCI management estimating the administrative costs associated with managing andmaintaining the portfolio of operating units which comprised the E-II Group. Interest expense was allocatedbased upon the BCI Notes which remained outstanding after the Distribution. U.S. federal and state unitaryincome tax expense was allocated as described in Note 8. In the opinion of management such allocationshave been made on a reasonable basis; however, the allocations are not necessarily indicative of the actualcosts which would have been incurred had the E-II Group actually operated as a separate, stand-alone entity,nor are they necessarily indicative of the costs which may be incurred in the future.

In the opinion of management, unaudited information reflects all adjustments necessary for a fairpresentation of the interim financial information. Such adjustments consist only of normal recurringadjustments.

E.II HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Certain amounts for previous periods in the condensed consolidated flnancial statements have beenreclassified to conform to the presentation used in the current period.

3. Short-term InvestmentsShort-term investments are carried at the lower of cost or market. Unrealized market losses are

aggregated in the valuation allowance. Investment losses, net, in the accompanying condensed consolidatedincome statement, include changes in the valuation allowance, realized gains on the liquidation of positionsin certain investments and dividend and interest income. Investment earnings (losses) for the quarter andnine months ended November 30, 1987 were as follows, in millions:

Quarter Nine Months

Dividend and interest income $ 20.0 $ 28.5Realized gains . 1.4 5.3Changes in valuation allowance (147.5) (147.5)

q8q1t !g11ztThe valuation allowance of $147.5 million at November 30, 1987 has decreased by $59.9 million, to $87.6million, on January 11, 1988 and the investments held have not changed materially.

4. Inventoriesfnventories, in millions, consist of the following:

November30, February28,19E7 1987

Rawmaterialsandsupplies..... $ 77.0Work in process 53.4Finished goods . 107.9

$2383

5. CapitalizationThe following table, in millions, summarizes the changes in capitalization since February 28, 1987.

Offerings andFebruary 28, Activity Distribution Repayments of

1987 To July 2 (Note 1) BCI Notes Other

$ 77.037.697.5

$212.1

November 30,1981

Long-term debt:l2.85Vo Senior Subordinated

Notes.13.O5Vo Subordinated

DebenturesOther.

Current maturities

Total long-term debt

BCI Notes

Stockholders' equity:Preferredstock....Common stock ....:::::: :::::Capital surplusAccumulated deficitE-II Group equity .

Total stockholders' equity. . . .

Total capitalization

$-

43.3

43.3(3.7)

39.6

$-

(.7).t

--rqr

$- $ 750.0

750.0

1,500.0

$-

(1.7)

-or).3

$ 750.0

750.0N.9

1,540'.9(3.3)

1,537.6

--rzl

800.0

1,500.0

(800.0)__99

269.9 (s.s)

.2292.7(26.0)

(264.4)

$-

,4264.0

,6556.7

(r36.3) (162.3)

269.9 (5.5) 266.9 395.0

$ 966.9 $(137.7) $1,932.6-9163)

!1,r0e5 $ (6.1

E.II HOLDINGS INC.

NOTES TO CONDENSBD CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Revolving cre dit agre em e n t s

E-II has entered into agreements with several banks providing an aggregate of $650 million of revolvingcredit facilities available for acquisitions. The agreements are for a term of approximately three years andcontain minimum net worth requirements and dividend, borrowing, leverage and interest coverage

restrictions. At each bank's option, payment of any borrowings may be required 120 days following the

completion of the subject acquisition. In the event Mr. Kelly ceases to function actively as the chief executiveofficer of E-II each bank also has the option of terminating the unused portion of its commitment. Borrowingsunder the agreements bear annual interest, at E-II's option, at the prime rate plus YcVo, a Eurodollar deposit

based rate plus lVo, a certificate ofdeposit based rate plas lV+Vo or a negotiated rate increasing, under certaincircumstances, to a maximum of ZVa over such rates. Commitment fees are r/cVo to LhVo pu annum of the

unused credit. A.dditional fees of up to lVo of the amounts borrowed are also required.

Offirings and repayment of BCI Notes

On July 9, 1987 E-II received net cash proceeds aggregating $1.7 billion from the issuance of $1.5 billionprincipal amount of debt securities and 20.7 million shares of common stock. A portion of such proceeds

were used to repay the BCI Notes as well as $1.75 million of inte.rest accrued since the date of Distribution.The repayment of the BCI Notes resulted in a noncash extraordinary charge to earnings amounting to $26

million ($.42 per share) which is presented in the foregoing table as affecting accumulated deficit.

Long-term debt

The Senior Subordinated Notes are due on March l, 1997 and require sinking fund payments of $250

million each on March 1, 1995 and 1996. At E-II's option, the 1995 payment may be increased by up to an

additional $125 million. The Subordinated Debentures are due on March l, 1999 and require a sinking fundpayment of $375 million on March 1, 1998. Both issues are redeemable at the option of E-II, in wholeor in part, on or after March l, lggz.Interest on both issues is payable semi-annually on March I and

September l.

Stockholders' equity

E-II's authorized capital consists of 100 million shares of preferred stock and 300 million shares ofcommon stock both with a par value of $.01 per share. No shares of preferred stock have been issued to date.

In the Distribution, E-II issued 41.1 million of its common shares to BCI all of which were distributed toBCI stockholders and warrant holders on July 2,1987. On July 9, 1987, E-I[ issued an additional 20.7 millioncommon shares in an initial public offering at $14.21 net per share. Also, in the Distribution, options toacquire 5.3 million shares of E-II common stock at $3.00 per share were issued to BCI option holders inaccordance with the anti-dilution provisions of their option agreements.

As described in Notes I and 2, E-II Group equity represents BCI's investment in the E-II Group, net ofintercompany balances exclusive of the BCI Notes. Activity in this account, from February 28, 1987 to the

date of Distribution, is detailed below, in millions.

Net loss $ (7.6)

BCI interest allocation 30.5

Administrative cost allocation 6.7

Incometaxallocation.... .2

Centralized cash management system, net . . (54.0)

Cumulative foreign currency adjustment 8.2

Other, net ... 10.5

q-(5r)

E.II HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Concluded)

6. Transactions With BCI

In connection with the Distribution, BCI and E-II entered into various agreements under which BCIutilizes the services of certain E-II personnel and E-II leases office space and various operating assets fromBCI and utilizes the services of certain BCI personnel. In addition, in the ordinary course of business, certainsubsidiaries of E-II and BCI maintain supplier relationships with each other. These transactions do notinvolve amounts which are material to either E-II or BCI.

7. Contingent Liabilities

BCI and E-II have entered into indemnification agreements which providq for the settlement of claimsor damages which may arise for periods prior to the Distribution. Neither BCI nor E-II management is awareof any significant impending liabilities that would give rise to claims under these agreements. Also, in theopinion of E-II management there are no claims or litigation pending which are expected to have a materiallyadverse effect on the consolidated financial condition of E-II.

8. Income Taxes

Through the date of the Distribution, the accounts of the E-II Group were included in the consolidatedU.S. federal and state unitary income tax returns of the Parent and, thus, associated accruals for U.S. federaland state unitary taxes are classifled as a component of the E-II Group equity. Income tax expenses andbenefits have been allocated to the E-II Group as if the E-II Group filed its own income tax returns for eachperiod presented.

Due to the uncertainty of realizing income tax benefits by utilizing E-II's fiscal 1988 taxable losses toreduce taxable income in future years, U.S. income tax benefits have not been provided in periods subsequent

to the Distribution. For periods prior to the Distribution, the effective tax rate differs from the U.S. federalstatutory rate primarily as a result of non-U.S. income taxes and non-deductible depreciation andamortization attributable to the BCI Acquisition.

9. Acquisitions

During the third quarter, one of E-II's operating units acquired a brass fittings firm at a cost ofapproximately $3 million. Several other operating units are in the process of completing certain acquisitionsaimed at complementing their existing businesses.

10

E.II HOLDINGS INC.

MANAGEMENT'S DTSCUSSION ANDOF FINANCIAL CONDITION AND RESULTS

ANALYSISOF OPERATIONS

OPERATIoNS

Prior to the Distribution the E-II Group was controlled by BCI. In addition, the E-II Group was

controlled by Beatrice prior to the BCI Acquisition. The following discussion addresses, and the followingtable includes, the results of E-II operations for periods both before and after the Distribution and the BCIAcquisition.

For periods prior to the Distribution, unallocated expense consists of an allocation of BCI administrativecosts amounting to $20 million on an annual basis. Such allocation was based on a study conducted by BCImanagement estimating the administrative costs associated with managing and maintaining the portfoto ofoperating units which comprised the E-II Group. Administrative costs incurred directly by the operating

are reflected in their respective segment earnings throughout the periods presented.

Unaudited Business Segment DataPeriods ended November 30,

(in millions)

Quarter19E7 19E6

$3s6.9 $316.5

107.0 98.5

$463.9 $415.1::

$140.7

(e2.2)

__Q945.9

$122.3

(80.7)

Q.6)

$ 363.3

(266.3)

(7.8)

$ 313.2

Qze.e)(6.s)

76.839.0

29.7 27.9

Nine Months

Net sales:

Consumer Products

Food Specialties.. .

Net sales

Operating earnings:Consumer Products:

Gross earnings . .. .

Selling and administrative expenses

Amortization of intangible assets .

Segment earnings

Food Specialties:

Gross earnings .. . .

Selling and administrative expenses

Amortization of intangible assets

Segment earnings

Unallocated expense

Operating earnings.

l1.5 11.4 24.4 2s.8

__(5r) _(5o) (16.8) _q5.9)$ 51.7 $ 45.4 $ 96.8 $ 87.6

$ 9s0.8

273.1

$1,223.9

$ 837.2

259.3

$1,096.5

89.2

(17.s)

(.7)

(1s.7)

___19

74.2 71.0

(47.7) (43.2)

(2.r') (2.0)

ll

E.II HOLDINGS INC.

MANAGEMENT'S DISCUS$ON AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued)

Nine Months Ended November 30, 1987 and 1986

Operating earnings for the nine months ended November 30, 1987 were $96.8 million, an ll%o increaseover the comparable period a year ago. Net sales rose l2%o, to $1,223.9 million from $1,096.5 million posted

last year. Primarily as a result of increased interest expense and unrealized investment losses, E-II reported a

loss of $ 1,$4 million before extraordinary item, compared to earnings of $ I I .4 million a year ago. During thesecond quarter of fiscal 1988, E-II was required to report a one-time, noncash extraordinary charge of $26million which represented previously deferred financing fees related to the BCI Notes which were repaid inJuly 1987, resulting in a net loss of $170 million for the nine months ended November 30, 1987.

Consumer Products

The Consumer Products segment includes nine companies that market products largely found in andaround the home. For the fiscal 1988 nine month period, this segment represents 78Vo of E-ll's net sales and79Vo of its total segment earnings. For the nine-month period, Consumer Products reported net sales of$950.8 million, a gain of 14Vo compared to $837.2 million reported last year. Volume improvementsaccounted for 72Vo of the increase while price increases accounted for \Vo and favorable exchange rates whichbenefit non-U.S. operating results of Samsonite and Culligan provided ZOVo. Segment earnings increased l6Vo,from $76.8 million last year to $89.2 million this year principally attributable to volume and marginimprovements and favorable exchange rates.

With the exception of the Home Products operations, all Consumer Products businesses reportedincreased sales and earnings when compared to the fiscal 1987 period. Sales volume at Samsonite luggage

was particularly strong due to the excellent trade reception of two new luggage lines-Oyster and SilhouetteLwhich began shipment during the second quarter. Also contributing to the volume increase werepromotional prices on certain of Samsonite's existing products. At Culligan, significant volume and marginimprovements were reported for domestic household water softeners and drinking water systems. At HomeFashions improved efficiencies in both the retail and commercial distribution channels for vertical blindswhich generated volume and margin increases reflected the initial benefits of recent management changes andthe completion of a restructuring of the Canadian operation. The Keeping in Touch personalized message

system introduced in the second quarter and significant volume increases in sales of the Senior Size PocketLoose Leaf Calendar contributed to the strong performance reported by Day-Timers. Volume increases forexisting Day-Timers products are attributable to mailings in new geographic markets and expansion intotelemarketing. These advances more than offset shortfalls reported by the Home Products operations wheredifficult market conditions affected proflt margins. Home Products operations consist of Waterloo tool storage

cabinets, Aristokraft kitchen cabinets and bath vanities, Samsonite Furniture, Twentieth Century plumbingand repair products and Stiffel lamps. Also partially offsetting improved earnings levels were increased

expenditures to support the introduction of new products and to improve marketing incentives, as well as

increased amortization of intangible assets attributable to the BCI acquisition.

Food Specialties

The Food Specialties segment consists of six companies that either have strong regional brands or occupyspecialized niches in the food industry. This segment accounts for 22Vo of E-II's year-to-date net sales and2lVo of its year-to-date segment earnings. Net sales of $273.1 million for the flscal 1988 nine month periodexceed the prior year level of $259.3 million by 5Vo while earnings of $24.4 million trailed last year's level of$25.8 million by 5Vo. The earnings decline is due primarily to increased raw material costs, with meat anddairy ingredients up significantly, Selective price increases which took effect in the third quarter have partiallyoffset these costs.

t2

E.II HOLDINGS INC.

MANAGEMENT'S DISCUSSION AND ANALYSEOF FINANCIAL CONDITION AND RESLTLTS OF OPERATIONS-(Continued)

Frozen Specialties, which manufactures and markets pizza, reported a strong sales and earningsperformance reflecting volume gains from improved distribution and a strong response to new promotionprograms. Volume increases were also reported by Martha White, Lowery's and Beatreme Food Ingredients.At these three companies, however, higher raw material prices and other operating costs resulted in anearnings shortfall ofset in part by price increases implemented in the third quarter. Increased amortizationof intangible assets attributable to the BCI acquisition also contributed to the decline.

Other Results

Outside interest expense has increased dramatically due to the debt securities issued last July in theOfferings, offset in part by the reduction in BCI allocated interest as a result of repaying the BCI Notes.During the third quarter of fiscal 1988, E-II recognized unrealized market losses of $147.5 million as a resultof the significant downturn in securities markets, particularly in securities of companies thought to beacquisition candidates. These unrealized market losses more than offset the dividend and interest incomeearned and gains realized on its short-term investment portfolio.

Quarter Ended November 30, 1987 and 1986

Despite a lZVo increase in sales and a l4Vo increase in operating earnings compared to the prior year,

E-II reported a net loss of $131.9 million for the third quarter ended November 30, 1987. The loss was causedprimarily by unrealized market losses of $147.5 million on the short-term investment portfolio reflecting thesignificant downturn in securities markets around the world. An increase in interest expense from $24.1million, including both outside and BCI allocated interest, for last year's third quarter to $50.9 million thisyear also contributed to the net loss and reflects the effect of the July 1987 issuance of $1.5 billion ofsubordinated debt securities.

Consumer Products

Consumer Products reported net sales increases of l3Vo. Sales for the segment were $356.9 million versus

$316.5 million ayer;r ago. Volume improvements accounted forT9Vo of the increase while price increasesaccounted for 9Vo and favorable exchange rates which benefit non-U.S. operating results of Samsonite andCulligan provided l2Vo. After amortization of intangibles of $2.6 million, segment earnings increased to $45.9million, a gain of nearly 18% above last year's figure of $39 million.

Samsonite luggage contributed 36Vo of the total segment sales increase as sales of its new Oyster andSilhouette 4 luggage lines continued strong and certain price increases took effect. Culligan reported volumeand margin improvements for domestic household water softeners and drinking water systems, contributingto its overall sales and earnings gains. Home Fashions continued to benefit from initiatives by newmanagement, increased operating efficiencies and the recent restructuring of the Canadian operations. Day-Timers continued to perform well during the quarter, strengthened by its recently introduced Keeping inTouch personalized message system. The expansion cf Day-Timers into telemarketing and new geographicmarkets is fueling the growth of existing product lines. Operating earnings at Home Products declined as

difficult market conditions continued to affect profit margins.

Food Specialties

Net sales of $107 million for Food Specialties exceeded the prior year level of $98.6 million by 9Vo.

Segment earnings increased slightly from $11.4 million last year to $11.5 million.

13

E.II HOLDINGS INC.

MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS{Concluded)

Frozen Specialties continued its strong performance. Plant capacity was added during the quarter toaccommodate increased demand. Sales increases were also generated by Martha White, Lowrey's andBeatreme Food Ingredients with Martha White accounting for 67Vo of the total segment sales increase. Theearnings shortfall for these three particular companies, however, continued due to higher raw material prices

only partially offset by price increases.

Frxlxcur CoNorrroN

E-II commenced operations in July 1987 when E-II and its fifteen operating units were distributed tothe shareholders of its former parent, BCI. Shortly thereafter, E-II received net cash proceeds approximating$1.7 billion from an initial public offering of 2O.7 million of its common shares and $1.5 billion of debtsecurities (the "Offerings"). BCI shareholders also sold 7.3 million of E-II's common shares in the 0fferings.A portion of the proceeds received by E-II were used to repay the BCI Notes, aggregating $800 million, whichhad been assumed by E-II in connection with its formation. The remaining proceeds were invested in aportfolio of short-term debt and equity securities. Management continually monitors the portfolio, evaluatinga number of the undedying public companies as potential acquisition or restructuring candidates whilemanaging the short-term return on the overall portfolio. After further investigation, certain equity positions

were fiquidated as it was concluded that continued investment in the underlying companies was not likely toprovide E-II with sufficient long-term returns. Other investments which had significant price increases werealso liquidated and still other investments are being held for further evaluation. Since July, the portfolio has

earned $28.5 million in dividend and interest income ($20 million in the third quarter) and $5.3 million ingains realized on securities transactions ($1.3 million in the third quarter). During the third quarter, E-IIrecognized $147.5 million of unrealized market losses on its portfolio holdings reflecting the dramatic priceadjustment which occurred in securities markets around the world. By January 11, 1988 such unrealizedlosses had been reduced by $59.9 million while the holdings in the portfolio had not changed materially.

E-II has entered into definitive revolving credit agreements with several banks providing an ?1,pregata

$650 million in bank financing, supplementing E-II's internal funds, to fund future acquisitions. Based ondiscussions with certain other banks, management believes additional financing for specific acquisitions willbe available as such acquisitions are identified.

During the third quarter, Twentieth Century, one of the Home Products operations, acquired a

manufacturer of fittings for the plumbing and industrial markets. Shortly after the end of the quarter, MarthaWhite completed its acquisition of Zatarain's a marketer of Cajun and Creole style foods. Certain otheroperating units are in the process of completing acquisitions aimed at complementing their existing businesses.

The cost of these acquisitions will be temporarily funded internally with the expectation that a substantialportion ofthe financing will be obtained externally, secured only by the acquired operations. Capital spendingprograms to upgrade production facilities at various operating units continue and are expected to improveprofit margins in future periods.

Although E-II is highly leveraged, with a debt to total capital ratio of SOVo at November 30, 1987,

management believes that cash generated by its operations, coupled with the interim investment of excess

cash balances, is sufficient to meet debt service and other obligations, as well as other capital requirements, as

they become due. However, in the long term, this may depend on E-II's ability to realize sufficient earningsand cash flow through acquisitions ofbusinesses or other investment strategies.

t4

E.II HOLDINGS INC.

PART II. OTHER INFORMATION

Item 5-Exhibits and Reports on Form 8-K

(a) Exhibits

None

(b) Reports on Form 8-K.

None

SIGNATURES

Pursuant to tle requirements of the Securities Exchange Act of 1934, the Registrant has duly causedthis Report to be signed on its behalf by the undersiped thereunto duly authorized.

E.II HOLDINGS INC.

D.. /s/ Rocr,n T. BRIGcS

Roger T. BriggsExecutive Yice President and

Chief Financial Oficer

/s/ J.S. ConconeN

J.S. CorcoranVic e Pre si d e n t-Financial

January 12, 1988

By

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